As of this blog, my beloved Colorado Avalanche are squaring off in the second round of the Stanley Cup Playoffs against the San Jose Sharks; my Denver Broncos have just drafted what we all hope is the next QB of the future in Drew Lock; and locally, the Arizona Diamondbacks are exceeding all expectations and putting together a string of decent wins. Things are certainly looking up in the sports world – for me at least – and also for the owners and general managers of all sports teams across the country. The IRS is passing out even more good news on trades.
In a previous blog, we discussed how under the “old” tax law professional sports franchises were allowed to trade players under the provisions of the like-kind exchange rules of Section 1031. That is, the teams would not recognize any “gain” on the trade, and therefore, there was no tax economic impact to factor in for general managers.
That all changed under the new tax law – TCJA (Tax Cuts and Jobs Act) did away with like-kind exchanges for non-real property (anything that isn’t real estate), and so teams were now faced with several dilemmas. The obvious ones are:
- Trades now have an immediate economic impact in the sense that there could be tax gain to recognize in the year of the trade, and
- How do we assign a value to these contracts that is reasonable and fair?
On April 10, 2019 (because apparently the IRS didn’t have anything else to do five days before the tax deadline), the IRS published Revenue Procedure 2019-18, which allowed sports teams to assign a zero value to contracts traded if the following safe harbor requirements are met:
- The teams are subject to United States income tax and treat the trade identically on their tax returns.
- Each team must only receive cash, draft picks or players as part of the trade. (I guess there are no more “trade-a-bad-player-for-a-bag-of-pucks/balls” jokes to make.)
- No contract or draft pick can be amortizable under the tax law.
- The financial statements of the teams cannot reflect assets or liabilities stemming from the trade, other than cash, if applicable.
The zero-value assumption helps teams not recognize gain on a trade since you would be exchanging assets with no tax value. The revenue procedure goes on to explain how certain instances of trades can produce gain in the event cash is exchanged for players, and how teams that pay cash can depreciate the basis of their cash investment over the life of the contract they received in the trade. If you have trouble falling asleep one night, check out the language here.
This comes as a welcome surprise to sports teams across the country. In the recent NFL draft, this new rule probably wasn’t the primary reason for the flurry of trades that happened, but I’m sure for the owners and general managers, it was much appreciated.
Brock R. Yates, CPA, MT